Mr FRYDENBERG (1:23 PM)
—What do the wine cask, the bionic ear and the flight recorder all have in common? They are names in a long list of Australian innovations. For Australia to prosper and compete in the future this list must grow and in this place we must do all that we can to cultivate and facilitate a business culture of enterprise and innovation. However, the Labor government has not got this message and that is why I rise today to speak on the Tax Laws Amendment (Research and Development) Bill 2010. The coalition opposes this bill. Labor’s proposed changes strike at the very heart of providing business incentives to pursue research and development and will, if passed, significantly impair any industry support for business R&D in Australia.

It is extremely disappointing that the legislation before the House is flawed in its approach to encouraging businesses to invest in research and development—a point obvious to many who should know. Leading global firm KPMG have been selectively quoted by those opposite, including today by the member for Deakin and the member for Oxley, in support of this bill; rather, KPMG have sounded serious warnings about its negative impact. KPMG’s national lead partner for R&D incentives, David Gelb, said:

That report was not at all based on the first or the second exposure draft. The report was predicated on there being no change to the definition of R&D.

There are some key issues that have yet to be resolved.

Cutting R&D concessions is not the right way nor is it the smart way to grow Australia’s industry and strengthen our economy over the long term. Indeed, as economists and right-minded policymakers emphasise the world over, technological progress is the critical factor that drives sustained economic growth. This bill makes such progress more difficult.

The government’s bill proposes altering the basic structure of Commonwealth government incentives for business research and development spending for the first time in more than two decades. If passed, this bill will replace the existing research and development tax concession that has been available to businesses since 1986 with a new R&D tax credit that will be retrospective from 1 July 2010. The idea of moving to a tax credit system is sound in principle, but the arrangements that underpin Labor’s legislation are not. The government’s bill was created in haste. Instead, we should ensure the present arrangements remain in place until at least 1 July 2011 so that business can have certainty and stability, and in the meantime work with industry to more comprehensively consider a more effective incentive system than that proposed here.

Given that the current legislative regime already imposes tough measures that business must satisfy to qualify for R&D assistance, this bill creates a series of new hurdles for Australian businesses to overcome in order to receive any assistance at all. Research and development are the hallmarks of innovation, and we must nurture any incentive structure and its tax environment to sustain onshore R&D through positive legislation and regulation. The bill does not achieve that. The bill does not give effect to the theme, which the Labor Party took to their 2007 election campaign, of promoting ‘national innovation’. As well, this bill is not in the spirit of Labor’s 2010 election promise of ‘a simpler, more generous R&D tax credit to encourage Australia’s two million businesses to undertake R&D’. Its substantive effect is quite at odds with what is claimed and, in fact, winds back support for research and development in Australia.

During a recent inquiry into this bill by the Senate Standing Committee on Economics, Medicines Australia expressed concerns when it highlighted the complexity of the bill’s rules relating to core and supporting R&D. Representatives from Australia’s university sector similarly suggested that any loss in R&D investment in Australia would negatively impact universities’ R&D capabilities. Both groups, instead, support more expansive definitions of eligible R&D. The government seems to have turned a deaf ear to these concerns and that of many others while hastily drafting and pushing through this bill.

The key issue before the House is whether the mechanism proposed in this legislation will be effective in encouraging research and development. We on this side of the House are clearly of the opinion that it will be entirely ineffective. If anything, to quote Sandra Mason, tax partner at PricewaterhouseCoopers, in an article that appeared in the Australian Financial Review on 1 February this year, the government’s idea of a new R&D incentive is ‘a kick in the guts for business’.

The government’s decision to pursue these changes and the way it has gone about it is incredulous, especially when, for the past 24 years, there has existed a bipartisan approach to supporting R&D in Australia. Although Commonwealth support has been repeatedly refined and amended over the years, the current system has worked and is very familiar to businesses and currently assists approximately 8,000 companies nationwide.

Under the Howard government, the current research and development tax concession was the principal instrument supporting innovation in Australia, with R&D priority areas including information and communications technology, biotechnology, manufacturing and mining, as well as sustaining the Australian food industry. The Howard government committed $380 million over 10 years, to 2011, to a centre of excellence for ICT research, research training and commercialisation. Established in 2002 as an independent, not-for-profit company the centre, known as National ICT Australia, is now one of Australia’s largest ICT research organisations and employs more than 300 research and support staff and around 260 postgraduate students.

In 2000, the Howard government launched a National Biotechnology Strategy, which was strengthened in 2004. The strategy was designed to enable government and key stakeholders to work together to ensure that developments in biotechnology were harnessed for the benefit of the entire Australian community, industry and the environment and to strengthen Australia’s competitiveness in biotechnology. The current tax concession that has made these and similar cutting-edge research and development opportunities possible has been achieved within an estimated cost to the budget of $1.5 billion in the most recent financial year.

However, when it comes to R&D this Labor government has consistently let down the side. This new incentive scheme has been contentious from the outset, most of all among those Australian businesses most committed to investing in science and innovation. Labor’s recent inability to articulate whether or not it will provide $7.5 million to the soldier survivability program is just one illustration. The program, which is aimed at improving the protective armour and personal survival equipment used by Australian troops on the front line is an excellent example of Australian R&D, Australian ingenuity and know-how.

Under this bill the activities eligible for support have been drastically reduced by the government. Within the current system, R&D activities must be ‘innovative’ or involve a ‘high level of technical risk’ to receive support. The government’s legislation would change this requirement to ‘considerable novelty’ and ‘high technical risk’. The proposed new incentive is a significant departure from the existing incentive and should be described as an entirely new measure, as the tests for eligibility will be not only tightened but substantially changed.

I am also concerned that businesses undertaking R&D need certainty over their tax environment. I am worried that the legal questions that will be created by Labor’s sweeping changes to the eligibility rules and tests, in particular the new distinction between ‘core’ and ‘supporting’ R&D and the dominant purpose test, will be substantial. These changes will have a detrimental effect on non-scientific, industrial research activities as they will not be eligible activities under this legislation, although they are currently eligible for the existing incentive.

Growth in business investment in R&D over the past two decades has increased the cost of the concession, but it has also paid substantial dividends to local, onshore knowledge building and innovation. In the long run, a nation’s capacity to innovate determines how quickly its economy can grow, how quickly it can increase living standards and how well equipped it is to prevail over economic, social or environmental challenges.

During the life of the last parliament, the structure of the existing R&D tax concession twice came under scrutiny, firstly, by the Productivity Commission, in 2007, and then closely followed, in 2008, by a review led by Dr Terry Cutler. In both cases alterations to the existing R&D tax concession were recommended. Merit exists in some of the recommendations and both the Productivity Commission and Dr Cutler raise a series of legitimate concerns over aspects of the operation of the existing R&D tax concession, in particular, the provision of support to some R&D which provides sufficient returns to the businesses that undertake it and which would occur whether or not the tax concession was in place. The government’s response, however, has incorporated the most onerous features of both cases, while ignoring their more generous aspects.

The business case for Labor’s changes to this incentive has not been made and this is reflected in the opinions of Australian business and industry. As the Australian Private Equity and Venture Capital Association Ltd, AVCAL, in their submission on the exposure draft, stated:

… the narrowing of the eligibility criteria for the R&D tax incentive will materially affect the future of many innovative businesses in Australia. These businesses, which would have been at the forefront of the Government’s efforts to foster home-grown innovation, will now be ineligible for the very incentives which are intended to propel innovation forward in Australia.

This change to the definition may unintentionally lead to the exclusion of many genuine, value-adding R&D activities that should be supported and that are currently eligible for support. This legislation will be counterproductive to the coalition’s goal of enhancing Australia’s innovation and technological future. In doing so, it threatens to limit our future economic prosperity. Labor clearly does not understand the key issues at stake. For this reason the coalition does not support the legislation.